Increasing your profits might sound like it’s an unattainable dream just out of your reach. But there are a finite number of ways that profits can be increased. Once you understand what they are, you’ll have clarity on how to best reach your goals.

There are two primary ways to increase profits:

• Raise revenue
• Lower expenses

That’s not particularly enlightening or instructional, is it? Let’s look at the four ways you can increase revenues and the four ways you can reduce expenses to get clearer on what actions we can take.

Four Ways to Increase Revenue

1. Raise prices

The easiest way to raise revenue is to simply raise prices. However, this is not foolproof and assumes you’ll be able to maintain the volume of sales you’ve achieved in the past.

This method is also limited by market demand, what your customers are willing to pay.

2. Add new customers

Adding new customers is what most entrepreneurs think about when raising revenue. Increasing your marketing or adding new marketing methods is typically the way to add new customers.

Another related option is to work hard to keep the customers you already have. You can also potentially contact the customers you lost and ask them to come back.

3. Introduce new products or services

For some companies, your products and services are changing every year. For others, not so much. To increase revenue, consider adding new products or services that will bring in an additional revenue stream that you didn’t have before.

Even if your products are changing every year, you can consider adding something completely different that your customer base would love.  For example, a hair salon could add a nail desk, a clothing store could add handbags or shoes, a grocery store could add a coffee bar, a restaurant could add catering, a landscaper could add hardscaping, and so on.

4. Acquisition

The final way a business can increase revenue is to acquire another business in a merger or acquisition.

Four Ways to Reduce Expenses

1. Negotiate for a better deal with vendors

If you’ve been working with a vendor for a while, you may be able to re-negotiate your contract with them. This is especially common with telecom companies. Call your phone provider and ask them for the latest deal. They always favor new customers over long term customers, but they don’t want to lose customers either. Just calling them usually yields a better price than what you are paying now.

2. Change vendors

If a vendor has gotten too expensive, it might be time to look for a new vendor. Health care insurance seems to be in this category. Often, changing providers will lower your costs.

3. Cut headcount

If there is not enough work to support your employees or not enough cash flow to pay them, then it might be time for a layoff or restructuring. You might also consider outsourcing a function that you previously did in-house.

4. Cut the expense or reduce services

It might be your business no longer needs to spend money on an expense. Perhaps this expense has been automated. In this case, it’s an easy decision to cut the expense out entirely.

Those are the eight ways to increase profits. Which one makes the most sense in your business? Create a plan around these eight ideas to boost your profit in 2017, and let us know if we can help.

Before we get too far into 2017, let’s take a look back at 2016 results and five meaningful numbers you may want to discover about your business’s performance.  To start, grab your 2016 income statement, or better yet, give us a call to help you compute and interpret your results.

Revenue per Employee

This number measures a company’s productivity with regard to its employees and is relevant and meaningful for all industries.  If you have part-time employees, compute a full time equivalent total and use that as your denominator.

Compare this number to prior years to see if your company is getting more or less productive.  Also compare this number to businesses in your same industry to see how your company compares to peer companies.

You may also want to compute other revenue calculations, such as revenue by geography, revenue by product line, or average sale: revenue by customer, if you feel these may be meaningful to your business.

Customer Acquisition Cost (CAC)

How much does it cost your business to acquire a new customer?  That is the customer acquisition cost and is made up of marketing and selling costs, including marketing and selling labor.  You’ll need the number of new customers acquired during 2016 in order to calculate this number.

Compare this number to prior years as well as industry peers.  You can potentially do a lot to lower this number by boosting your marketing skills and implementing lower cost marketing channels.

Overhead Costs

Overhead costs are costs that are not directly attributable to producing or selling your products and services.  They include items such as rent, telephone, insurance, legal expenses, and executive salaries.  Although it’s not standard practice to break out overhead expenses from other expenses on an income statement, it’s valuable to know the numbers for performance purposes.

Compare your overhead costs to prior years and industry averages.  You can actively manage your overhead cost by re-negotiating with vendors on a regular basis and trimming where it makes sense.

Profit Margins

Your profit margin can help you determine which division of your business is most profitable.  If you sell more than one product or service, you can compute a gross or net margin by product or service.  You can also compute margins by geography, sales rep, employee, customer, or any other meaningful segment of your business.

Your accounting system may be able to generate an income statement by division if everything has been coded correctly and overhead has been allocated appropriately.  Reach out if you’d like us to help you with this.

Seeing which service or product is most profitable can help you decide if you want to try to refocus marketing efforts, change prices, discontinue items, fire employees, attract a different type of customer, or any number of other important decisions for your business.

Breakeven Point

Do you know how many units you need to sell in order to start generating a profit?  If not, the breakeven calculation can help you learn this information.  The formula is Fixed Costs / (Sales Price per Unit – Variable Costs per Unit) which results in the number of units you need to sell in order to “break even” or cover your overhead costs.

The breakeven point helps you plan the amount of volume you need in order to ensure that you have healthy profits and plenty of cash flow in your business.

These five numbers can help you interpret your business performance on a deeper level so you can make better decisions that will lead to increased success in your business.  If we can help with any of them, please give us a call any time.

If there is a period of time between when your customers receive your goods or services and when they pay for them, then several things are true:

• You have a balance in Accounts Receivable on your balance sheet that represents how much customers owe you
• You have an invoice process that you follow
• You have granted credit to customers
• You may have some that don’t pay as quickly as you’d like them to

Each invoice you send should have payment terms listed.  A payment term is the period of time you expect the invoice to be paid by the customer.  Your payment terms should be set by you, not your customers!

Payment terms are always measured from the invoice date and define when the payment should be received.  Here are some common payment terms in accounting terminology, and then in English.

Net 30
Payment is due 30 days from the invoice date.

2/10 Net 30
Payment is due 30 days from the invoice date.  If you pay the invoice in 10 days, you can take a 2% discount off the total amount of the invoice as an early pay discount incentive.

Due Upon Receipt
Payment is due immediately

If you use Net 30 or Due Upon Receipt, then you may want to change your terms to get paid faster.  When people see Due Upon Receipt, sometimes they translate it into “I can take my time.”  A more specific term spelled out such as Net 7 or Net 10 will actually get you your money faster than Due Upon Receipt.

Do you have issues with people paying you late?  If so, you might want to set consequences.  Consider adding a line on your invoice that provides interest charges if the payment is late.  Utility companies do it, and so do many businesses.  A common percentage to charge is 1% – 2%, however, some states have laws that limit you to 10% or another percentage.

The wording would be something like this:

“Accounts not paid within __ days of the date of the invoice are subject to a __% monthly finance charge.”

You will also need to make sure your accounting system can automatically compute these fees.

If you have questions about payment terms, your invoicing process, or your accounts receivable, please reach out.